Australia cuts interest rates to all-time low as end of mining boom looms

Australia’s central bank has lowered interest rates to an all-time low amid
concerns about the end of the mining boom and a decline in investment.

Australia’s economy has largely avoided the fallout from the global financial crisis due to a decade-long mining boom, fuelled by demand from China. However, slower demand from China in the past year has led to declining investment and several large-scale resources projects have had to be shelved or abandoned.Photo: Reuters

The cash rate has been cut by a total of 2.25 percentage points in less than two years and was today reduced by a quarter of a percentage point to 2.5pc - the lowest since the Reserve Bank of Australia was established in 1959.

The bank said growth was lower than expected and cited rising unemployment, which is close to 6pc.

The bank’s governor, Glenn Stevens, said further falls in the Australian dollar could help to “rebalance” the economy and trigger growth in the non-mining sector. The dollar has fallen 15 per cent since April, though it rose slightly after today’s announcement because the bank’s statement was less forceful than expected.

"This [below-trend growth] is expected to continue in the near term as the economy adjusts to lower levels of mining investment," Mr Stevens said.

"It is possible that the exchange rate will depreciate further over time, which would help to foster a rebalancing of growth in the economy.”

Australia’s economy has largely avoided the fallout from the global financial crisis due to a decade-long mining boom, fuelled by demand from China. However, slower demand from China in the past year has led to declining investment and several large-scale resources projects have had to be shelved or abandoned.

Analysts said the rate cut was expected but the bank’s comments suggested it had no immediate plans for further cuts.

"The RBA is back in watch and wait mode,” said Greg Gibbs, senior currency strategist at RBS. “They would like to keep the Australian dollar low, but probably understand that cutting rates too quickly, such that it projects a bottom is close, will be counterproductive.”

Though the falling dollar is expected to boost the retail, manufacturing and tourism sectors, recent figures have shown job advertisements are dropping and consumer and business sentiment is weak. Government figures this week showed retail sales had posted their weakest year in more than half a century.

The bank’s announcement came just days after Australia's Prime Minister, Kevin Rudd, triggered a five-week federal election campaign. It was the first rate cut during a campaign since 1990.

Mr Rudd has sought to highlight the dangers facing the Australian economy in an attempt to bolster his credentials as the leader who steered Australia through the financial crisis.

However, the opposition said interest rates were “past the emergency level” and heading towards the near-zero “catastrophe” levels in the United States and Japan.

“If the economy was performing well the Reserve Bank wouldn't have moved today,” said an opposition MP, Joe Hockey. “It's not a great credit to this government at all.”